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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5587
READING & BATES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-0642271
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Threadneedle, Suite 200, Houston, Texas 77079
(Address of principal executive offices)(Zip Code)
(713)496-5000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK
AT OCTOBER 15, 1996 : 71,222,261
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company or Group of Companies for Which Report is Filed:
Reading & Bates Corporation and Subsidiaries
The financial statements for the three and nine month periods ended
September 30, 1996 and 1995, include, in the opinion of the Company, all
adjustments (which consist only of normal recurring adjustments) necessary
to present fairly the financial position and results of operations for
such periods. The financial data for the three and nine month periods
ended September 30, 1996 included herein have been subjected to a limited
review by Arthur Andersen LLP, the registrant's independent public
accountants, whose report is included herein. Results of operations for
the three and nine month periods ended September 30, 1996 are not
necessarily indicative of results of operations which will be realized for
the year ending December 31, 1996. The financial statements should be
read in conjunction with the Company's Form 10-K for the year ended
December 31, 1995.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35,045 $ 36,171
Accounts receivable:
Trade, net 62,695 41,324
Other 5,808 4,815
Materials and supplies inventory 11,983 8,911
Other current assets 3,305 4,567
--------- ---------
Total current assets 118,836 95,788
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 856,890 756,147
Other 43,470 29,898
--------- ---------
Total property and equipment 900,360 786,045
Accumulated depreciation and
amortization (288,265) (280,440)
--------- ---------
Net property and equipment 612,095 505,605
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 7,720 4,387
--------- ---------
TOTAL ASSETS $ 738,651 $ 605,780
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations $ - $ 12,000
Long-term obligations due
within one year 17,000 18,333
Accounts payable - trade 7,750 3,639
Accrued liabilities 20,415 20,518
--------- ---------
Total current liabilities 45,165 54,490
LONG-TERM OBLIGATIONS 176,468 95,040
OTHER NONCURRENT LIABILITIES 58,867 51,718
DEFERRED INCOME TAXES 3,504 2,977
--------- ---------
Total liabilities 284,004 204,225
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 43,077 44,504
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value - 2,985
Common stock, $.05 par value 3,557 3,095
Capital in excess of par value 370,113 362,910
Retained earnings (deficit)
from March 31, 1991 45,304 (3,017)
Other (7,404) (8,922)
--------- ---------
Total stockholders' equity 411,570 357,051
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 738,651 $ 605,780
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 76,413 $ 54,661 $ 199,303 $ 153,018
--------- --------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 33,880 30,503 90,837 93,648
Depreciation 8,684 7,786 23,992 22,599
General and administrative 5,411 3,686 15,395 12,121
--------- --------- --------- ---------
Total costs and expenses 47,975 41,975 130,224 128,368
--------- --------- --------- ---------
OPERATING INCOME 28,438 12,686 69,079 24,650
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (3,362) (3,944) (9,786) (11,697)
Interest income 551 498 1,534 1,403
Other, net (706) (272) (1,864) (954)
--------- --------- --------- ---------
Total other income
(expense) (3,517) (3,718) (10,116) (11,248)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 24,921 8,968 58,963 13,402
INCOME TAX EXPENSE (BENEFIT) 1,097 (193) 3,369 1,539
--------- --------- --------- ---------
INCOME AFTER INCOME TAX EXPENSE
AND BEFORE MINORITY INTEREST 23,824 9,161 55,594 11,863
MINORITY INTEREST (1,179) (61) (3,642) (700)
--------- --------- --------- ---------
NET INCOME 22,645 9,100 51,952 11,163
DIVIDENDS ON PREFERRED STOCK 1,206 1,212 3,631 3,642
--------- --------- --------- ---------
NET INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 21,439 $ 7,888 $ 48,321 $ 7,521
========= ========= ========= =========
PRIMARY NET INCOME PER
COMMON SHARE $ .34 $ .13 $ .78 $ .13
========= ========= ========= =========
FULLY DILUTED NET INCOME
PER COMMON SHARE $ .32 $ n/a $ .74 $ n/a
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,952 $ 11,163
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 23,992 22,599
Loss (gain) on dispositions of
property and equipment (5,585) 323
Recognition of deferred expenses 2,655 6,640
Minority interest in income of
consolidated subsidiaries 3,642 700
Changes in assets and liabilities:
Accounts receivable, net (21,891) (6,320)
Materials and supplies inventory (2,364) (1,493)
Deferred charges and other assets (4,477) (5,689)
Accounts payable - trade 1,972 (8,040)
Accrued liabilities 500 (2,790)
Accrued interest 3,558 4,246
Deferred mobilization revenue 5,995 -
Income taxes (810) -
Deferred income taxes 527 (98)
Other, net 2,532 1,015
---------- ----------
Net cash provided by operating activities 62,198 22,256
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment 8,973 603
Purchases of property and equipment (133,883) (33,450)
Business acquisitions - (400)
Increase in investments in and advances
to unconsolidated investees (516) (552)
---------- ----------
Net cash used in investing activities (125,426) (33,799)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds on short-term obligations (12,000) 1,050
Net proceeds from revolving credit facility 91,000 -
Proceeds from long-term obligations - 25,000
Principal payments on long-term obligations (12,500) (20,970)
Exercise of stock options 4,352 2,149
Dividends paid on preferred stock (3,631) (3,642)
Distribution to minority shareholders
of consolidated subsidiaries (5,119) -
---------- ----------
Net cash provided by financing activities 62,102 3,587
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,126) (7,956)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 36,171 42,319
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,045 $ 34,363
========== ==========
Supplemental Cash Flow Disclosures:
Interest paid $ 7,400 $ 8,346
Income taxes paid $ 3,523 $ 2,339
Noncash investing activities:
Purchase of property and equipment
in exchange for debt $ 2,139 $ 24,708
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A) SIGNIFICANT ACCOUNTING POLICIES
CAPITALIZED INTEREST - The Company capitalizes interest
applicable to the acquisition, exploration and development of
offshore oil and gas properties as a cost of such assets. Interest
capitalized for the three and nine month periods ended September 30,
1996 was $.8 million and $2.0 million, respectively and is shown net
of interest expense in the Consolidated Statement of Operations. No
interest was capitalized during the three and nine month periods
ended September 30, 1995.
FOREIGN CURRENCY TRANSACTIONS - In the third quarter of
1996, the Company entered into a short-term foreign exchange forward
contract to hedge a firm commitment relating to the purchase of
equipment. This contract is intended to reduce currency risk from
exchange rate movements. Gains and losses are deferred and
accounted for as part of the underlying transaction. At September
30, 1996, the Company had outstanding forward exchange contracts to
purchase Danish kroner totaling approximately $8.2 million.
NET INCOME PER COMMON SHARE - Primary net income per common
share is computed by dividing net income, after deducting the
preferred stock dividend, by the weighted average number of common
shares outstanding during the period. Fully diluted net income per
common share assumes the conversion of the preferred stock at the
beginning of the period and is computed by dividing net income by
the weighted average number of common shares outstanding during the
period and the additional shares from the assumption of the
conversion of the preferred stock. The effects of common equivalent
shares were immaterial for all periods presented and, accordingly,
no adjustment was made for these common equivalent shares.
RECLASSIFICATION - Certain prior period amounts in the
consolidated financial statements have been reclassified for
comparative purposes. Such reclassifications had no effect on the
net income or the overall financial condition of the Company.
B) COMMITMENTS AND CONTINGENCIES
COMMITMENTS - In June 1996, the Company entered into an
agreement to purchase the floating production storage and shuttle
vessel, the "SEILLEAN" for approximately $42.2 million. In
September 1996, the Company finalized the agreement and took
delivery of the vessel.
LITIGATION - The Company is one of the defendants in certain
litigation brought in July 1984 by the Cheyenne-Arapaho Tribes of
Oklahoma in the U.S. District Court for the Western District of
Oklahoma, seeking to set aside two communitization agreements with
respect to three leases involving tribal lands in which the Company
previously owned interests and to have those leases declared
expired. In June 1989, the U.S. District Court entered an interim
order in favor of the plaintiffs. On appeal, the U.S. Court of
Appeals for the Tenth Circuit upheld the decision of the trial court
and petitions for rehearing of that decision were denied. Petitions
for writs of certiorari filed by the parties with the U.S. Supreme
Court have been denied, and the case has been remanded to the trial
court for determination of damages. In June 1996, this matter was
settled, and the litigation was dismissed with prejudice, without
significant financial statement impact.
On March 17, 1995, an action was filed by Louis Silverman,
individually and on behalf of all other shareholders of Reading &
Bates Corporation similarly situated, against the Company and the
individual members of its board of directors in the Court of
Chancery of the State of Delaware, New Castle County. On April 7,
1995 three additional actions were filed on behalf of Congregation
Beth Joseph, Harry Lewis and Mortimer Shulman against the Company
and its directors in the Court of Chancery of the State of Delaware.
In each of the four actions, the plaintiff alleged, inter alia, that
the directors breached their fiduciary duties by rejecting the
previously announced unsolicited merger proposal made by Sonat
Offshore Drilling Inc. and by adopting the previously announced
shareholder rights plan. Each of the named plaintiffs in the four
actions purported to be an owner of the Company's Common Stock and
sought to represent a class of shareholders of the Company who are
similarly situated. Each of the plaintiffs sought injunctive relief,
damages in unspecified amounts and certain other relief, including
costs and expenses. In March 1996, the plaintiffs in each of the
four actions voluntarily dismissed same on a without prejudice
basis, and the court entered orders accordingly.
EMPLOYMENT CONTRACTS - The Company has committed under
employment contracts to provide each of two key executives with
severance benefits (the aggregate of such benefits to both
executives amounting to approximately $3.7 million) which vest in
September 2003 or earlier if an entity in which each such executive
has an interest reduces its ownership of the Company's common stock
below a specified level and such executive gives notice of
termination of his employment in accordance with the terms of his
employment contract. The Company amortizes the cost of the
severance benefits over the ten year period from September 1993 to
September 2003, unless the relevant reduction of stock ownership and
termination of employment contract occurs prior to September 2003 in
which case the unamortized severance cost would be expensed. In the
second quarter of 1996, one of the two key executives gave such
notice of termination following the relevant reduction of stock
ownership by the entity in which he had an interest. In the same
period, the Company paid the key executive severance benefits in
accordance with his employment contract and expensed the related
unamortized severance cost of approximately $.6 million. The
unaccrued severance benefits for the remaining key executive at
September 30, 1996 was approximately $2.0 million.
C) OTHER NONCURRENT LIABILITIES
The components of "OTHER NONCURRENT LIABILITIES" were as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Postretirement benefit obligations $ 15,727 $ 15,993
Accrued interest expense related to the
8% Senior Subordinated Convertible
Debentures due December 1998 11,523 10,410
Deferred mobilization revenue 5,994 -
Gain on sale of drilling unit 6,648 7,229
Foreign income taxes 6,004 5,893
Net liabilities associated with
discontinued operations 6,351 5,818
Pension obligations 4,767 5,090
Other 1,853 1,285
--------- ---------
Total $ 58,867 $ 51,718
========= =========
</TABLE>
The Company recorded deferred mobilization revenue as a
result of receiving a partial payment of a mobilization fee in
advance for one of its drilling units which is currently mobilizing
from one operating area to another.
D) CAPITAL SHARES
CONVERTIBLE PREFERRED STOCK - On August 5, 1996, the
Company announced it would redeem all of the outstanding shares of
its $1.625 Convertible Preferred Stock, par value $1.00 per share
(the "Preferred Stock"), on September 30, 1996 at the redemption
price of $26.1375 per share. However, the majority of the Preferred
Stock outstanding was converted into approximately 8.6 million
shares of the Company's common stock on or before September 30, 1996
and on September 30, 1996 approximately 1,041 shares were redeemed
by the Company.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Reading & Bates Corporation
We have reviewed the accompanying consolidated balance sheet of
Reading & Bates Corporation (a Delaware corporation) and Subsidiaries as
of September 30, 1996, and the related consolidated statements of
operations for the three and nine month periods ended September 30, 1996
and 1995 and the consolidated statement of cash flows for the nine month
periods ended September 30, 1996 and 1995. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based upon our review, we are not aware of any material
modifications that should be made to the financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Houston, Texas
October 11, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company intends to continue to modernize and expand its fleet in
order to meet the requirements of competitive conditions in the offshore
drilling industry and the changing needs of its customers. In this
regard, the Company made significant capital expenditures, $133.9 million,
in the first nine months of 1996 primarily related to capital upgrades to
the fleet to fulfill obligations under existing contracts or to improve
the marketability of certain of the Company's offshore units. Also in
this regard, the Company has from time to time in the past engaged in, and
currently continues to engage in, preliminary discussions with other
industry participants with respect to business combinations that would
potentially strengthen its competitive position in the offshore drilling
industry. Moreover, the Company continues to consider the selective
acquisition of existing rigs, directly or through business combination
transactions.
In October 1995, the Company purchased an approximate 20% working
interest in the Green Canyon 254 Allegheny oil and gas development project
in the U.S. Gulf of Mexico from the operator, Enserch Exploration, Inc.
("Enserch"). Mobil Exploration & Producing Inc., an affiliate of Mobil
Corporation, has a 40% working interest in the project. Enserch retained
the remaining 40% working interest. The Company has been contracted by
Enserch to provide "RIG 41" which may be used to drill the development
wells, and the Company or one of its affiliates may act as contractor in
the conversion of a second-generation semisubmersible rig to a floating
production vessel (FPV). Originally, the Company's third-generation
semisubmersible, the "M.G. HULME, JR.", had been contracted for three
years to drill the development wells upon completion of an upgrade of the
unit and it was expected that the working interest owners would utilize
the Company's "RIG 41" for the FPV conversion project. However, at the
Company's request, Enserch released the "M.G. HULME, JR." from its three
year contract and the working interest owners purchased a different
second-generation semisubmersible rig for the FPV conversion project.
"RIG 41" has now been contracted to Enserch for a one year contract upon
completion of an upgrade of the unit for drilling operations in up to
3,300 feet of water. As of September 30, 1996, the Company had
accumulated costs related to its ownership in such project of
approximately $36.4 million. In July 1996, the Company entered into an
agreement with Shell Offshore Inc. to drill an appraisal well at the
Company's expense in Shell's East Boomvang prospect in the Gulf of Mexico,
and if the results are positive the Company will earn a working interest
and proceed with the development of the field. The estimated cost to
drill the appraisal well is approximately $8.0 million, and the Company
currently expects to commence drilling operations in early 1997. The
Company continues to consider selective expansion in the floating
production market through additional management contracts, alliances with
other companies, the acquisition of floating production equipment, and/or
participation in field development projects.
In April 1996, the Company sold its mat-supported jackup drilling
unit, the "D. K. McINTOSH", for $8.5 million in cash and recognized a gain
on the sale in the second quarter of 1996 of approximately $3.5 million.
The gain appears as an offset to operating expenses in the Consolidated
Statement of Operations.
In September 1996, the Company purchased the floating production
storage and shuttle vessel, the "SEILLEAN", for approximately $42.2
million. The vessel was built in 1990 for extended well testing, early
production and life of field production and is currently working in the
U.K. sector of the North Sea. The vessel will remain under its current
operational contract which is anticipated to have a remaining term of
approximately 1.5 years, subject to earlier cessation of production from
the field in which the vessel is operating.
In April 1996, the Company increased its credit facility agreement
with Christiania Bank og Kreditkasse (the "CBK Facility") from $55 million
(inclusive of up to a $10 million letter of credit facility) to $100
million (inclusive of up to a $20 million letter of credit facility). In
July 1996, the Company increased the CBK Facility to $140 million
(inclusive of up to a $20 million letter of credit facility). The current
CBK Facility is collateralized by vessel mortgages on nine of the drilling
units owned by the Company and related assignments of insurance and
earnings. The Company is currently negotiating a further substantial
increase/refinancing of this facility, which could result in a charge to
earnings in the fourth quarter of 1996 of approximately $1.0 million as
the result of the expense of unamortized financing costs. Such amount is
included in "Deferred Charges and Other Assets" as of September 30, 1996.
On August 5, 1996, the Company announced it would redeem all of the
outstanding shares of its $1.625 Convertible Preferred Stock, par value
$1.00 per share (the "Preferred Stock"), on September 30, 1996 at the
redemption price of $26.1375 per share. However, the majority of the
Preferred Stock outstanding was converted into approximately 8.6 million
shares of the Company's common stock on or before September 30, 1996 and
on September 30, 1996 approximately 1,041 shares were redeemed by the
Company.
In the third quarter of 1996, the Company entered into a short-term
foreign exchange forward contract to hedge a firm commitment relating to
the purchase of equipment. This contract is intended to reduce currency
risk from exchange rate movements. Gains and losses are deferred and
accounted for as part of the underlying transaction. At September 30,
1996, the Company had outstanding forward exchange contracts to purchase
Danish kroner totaling approximately $8.2 million.
Liquidity of the Company should be considered in light of the
fluctuations in demand experienced by drilling contractors as changes in
oil and gas producers' expectations, budgets, and drilling plans occur.
These fluctuations can impact the Company's liquidity as supply and
demand factors directly affect utilization and dayrates, which are the
primary determinants of cash flow from the Company's operations. As of
September 30, 1996, approximately $12.8 million of total consolidated cash
and cash equivalents of $35.0 million are restricted from the Company's
use outside of Arcade Drilling AS, a majority owned subsidiary of the
Company. The Company received $10.6 million in the first quarter of 1996
with respect to a distribution to stockholders declared by Arcade Drilling
AS. The Company's trade receivables at September 30, 1996 have increased
from December 31, 1995 primarily as a result of increased revenues. The
Company's management currently expects that its cash flow from operations,
in combination with cash on hand and other sources, including new debt,
new equity, asset disposals and/or by proper scheduling of its planned
capital or other expenditures, will be sufficient to satisfy the Company's
1996 and 1997 working capital needs, planned investments, capital
expenditures on its existing fleet, debt, lease and other payment
obligations.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1995
The Company's net income for the nine months ended September 30, 1996
was $52.0 million ($.78 per share after preferred stock dividends of $3.6
million) compared with net income of $11.2 million ($.13 per share after
preferred stock dividends of $3.6 million) for the same period of 1995.
Income from operations for the nine months ended September 30, 1996 was
$69.1 million compared to income from operations of $24.7 million in 1995.
The Company's fleet utilization for the nine months ended September 30,
1996 and 1995 was 91% and 85%, respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $46.3 million increase in operating revenues for the nine
months ended September 30, 1996 over the same period in 1995 is due to
increased dayrates and utilization of the semisubmersible fleet and
increased dayrates of the jackup fleet. Average dayrates for the
Company's fourth-generation semisubmersible fleet, third-generation
semisubmersible fleet, and jackup fleet increased 39.7%, 30.3%, and
8.5%, respectively, for the nine months ended September 30,1996 as
compared to the same period in 1995, which accounted for the largest part
of the increase in operating revenues. Also, the addition of the
"IOLAIR", a third-generation semisubmersible, the "J. W. McLEAN", a
second-generation semisubmersible, and the "SEILLEAN", a floating
production storage and shuttle vessel, to the fleet contributed to the
increase in operating revenues in the first nine months of 1996. A
decrease in the average dayrates earned by the Company's two tenders
slightly offset the improvements contributed by the semisubmersible and
jackup fleets.
Operating expenses do not necessarily fluctuate in proportion to
changes in operating revenues. The continuation of personnel on board and
equipment maintenance is generally still necessary when the Company's
offshore units are stacked. It is only during prolonged stacked periods
that the Company is significantly able to reduce labor costs and equipment
maintenance expense. Additionally, labor costs fluctuate due to the
geographic diversification of the Company's offshore units and the mix of
labor between expatriates and nationals as stipulated in the operating
contracts. In general, labor costs increase primarily due to higher
salary levels and inflation. Equipment maintenance expenses fluctuate
depending upon the type of activity the offshore unit is performing and
the age and condition of the equipment. Scheduled maintenance of
equipment and overhauls are performed in accordance with the Company's
preventive maintenance program. Operating expenses for an offshore unit
are typically deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $2.8 million decrease in operating expenses for the nine months
ended September 30, 1996 as compared to the same period in 1995 is
primarily due to the sale of the "D. K. McINTOSH" in 1996 and reduced
expenses associated with several drilling units. In particular, operating
expenses for the sold rig decreased as a result of the recognition of a
$3.5 million gain on the sale in the first nine months of 1996. Also, the
"RON TAPPMEYER" and the "HARVEY H. WARD" incurred reduced operating
expenses during the first nine months of 1996 as the drilling units
operated in less expensive operating areas as compared to the first nine
months of 1995 when the rigs operated in Australia, a relatively more
expensive operating area. Additional decreases occurred on the "HARVEY
H. WARD" due to significantly lower levels of contract preparation and
mobilization amortization, and on the "RON TAPPMEYER" due to the
capitalization of expenses related to a major upgrade in the first nine
months of 1996. Further, management fees for the "PAUL B. LOYD, JR."
effectively decreased since the management contract previously held by
Sonat Offshore Drilling Inc. expired in December 1995 and is now held by a
subsidiary of the Company. As an offset to these operating expense
reductions, the Company had increases in operating expenses for the nine
months ended September 30, 1996 as compared to the nine months ended
September 30, 1995 due to the addition of the "IOLAIR" and the "J. W.
McLEAN" to the fleet and increased lease expense associated with the
sale/lease-back of the "M. G. HULME, JR.".
General & administrative expense increased for the nine months ended
September 30, 1996 as compared to the same period in 1995 primarily due to
increases in payroll and related expenses associated with employee
incentive plans. In addition, 1996 includes a $.6 million charge related
to severance benefits for a key executive whose employment was terminated
during the period. See Note B of Notes to Consolidated Financial
Statements.
Other, net for the nine months ended September 30, 1996 included $1.2
million of expenses associated with the business combination discussions
with Transocean AS which were terminated.
Income tax expense increased for the nine months ended September 30,
1996 as compared to the same period in 1995 primarily due to the increase
in the Company's pretax income and a third quarter 1995 resolution of a
foreign tax assessment at less than expected costs.
Minority interest relates primarily to the results of Arcade Drilling
and the percentage attributable to stockholders other than the Company.
Arcade Drilling reported net income of $14.3 million and $2.5 million for
the nine months ended September 30, 1996 and 1995, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1995
The Company's net income for the three months ended September 30, 1996
was $22.6 million ($.34 per share after preferred stock dividends of $1.2
million) compared with net income of $9.1 million ($.13 per share after
preferred stock dividends of $1.2 million) for the same period of 1995.
Income from operations for the three months ended September 30, 1996 was
$28.4 million compared to income from operations of $12.7 million in 1995.
The Company's fleet utilization for the three months ended September 30,
1996 and 1995 was 91% and 86%, respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $21.8 million increase in operating revenues for the
three months ended September 30, 1996 over the same period in 1995 is
primarily due to increased dayrates of the semisubmersible fleet. Average
dayrates for the Company's fourth-generation semisubmersible fleet and
third-generation semisubmersible fleet increased 49.7% and 30.7%,
respectively, for the three months ended September 30, 1996 as compared
to the same period in 1995, which accounted for the largest part of the
increase in operating revenues. Also, the addition of the "IOLAIR", a
third-generation semisubmersible, the "J. W. McLEAN", a second-generation
semisubmersible, and the "SEILLEAN", a floating production storage and
shuttle vessel, to the fleet contributed to the increased operating
revenues in the third quarter of 1996.
Operating expenses do not necessarily fluctuate in proportion to
changes in operating revenues. The continuation of personnel on board and
equipment maintenance is generally still necessary when the Company's
offshore units are stacked. It is only during prolonged stacked periods
that the Company is significantly able to reduce labor costs and equipment
maintenance expense. Additionally, labor costs fluctuate due to the
geographic diversification of the Company's offshore units and the mix of
labor between expatriates and nationals as stipulated in the operating
contracts. In general, labor costs increase primarily due to higher
salary levels and inflation. Equipment maintenance expenses fluctuate
depending upon the type of activity the offshore unit is performing and
the age and condition of the equipment. Scheduled maintenance of
equipment and overhauls are performed in accordance with the Company's
preventive maintenance program. Operating expenses for an offshore unit
are typically deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $3.4 million increase in operating expenses for the three months
ended September 30, 1996 as compared to the same period in 1995 is
primarily due to the addition of the "IOLAIR", the "J. W. McLEAN", and the
"SEILLEAN" to the fleet and increased lease expense associated with the
sale/leaseback of the "M. G. HULME, JR.". These increases were partially
offset by decreased expenses on the "HARVEY H. WARD" due to operations in
a less expensive operating area in the third quarter of 1996 as compared
to the third quarter of 1995 when the rig operated in Australia, a
relatively more expensive operating area, and significantly lower levels
of contract preparation and mobilization amortization in the third quarter
of 1996. Additionally, the "M.G. HULME, JR." and the "RON TAPPMEYER"
incurred reduced operating expenses due to the 1996 capitalization of
expenses related to major upgrades. Further, management fees for the
"PAUL B. LOYD, JR." effectively decreased since the management contract
previously held by Sonat Offshore Drilling Inc. expired in December 1995
and is now held by a subsidiary of the Company.
General & administrative expense increased for the three months ended
September 30, 1996 as compared to the same period in 1995 primarily due to
increases in payroll and related expenses associated with employee
incentive plans.
Income tax expense increased for the three months ended September 30,
1996 as compared to the same period in 1995 primarily due to the increase
in the Company's pretax income and a third quarter 1995 resolution of a
foreign tax assessment at less than expected costs.
Minority interest relates primarily to the results of Arcade Drilling
and the percentage attributable to stockholders other than the Company.
Arcade Drilling reported net income of $4.6 million and $.1 million for
the three months ended September 30, 1996 and 1995, respectively.
FORWARD LOOKING STATEMENTS AND ASSUMPTIONS
This Quarterly Report on Form 10-Q may contain or incorporate by
reference certain forward-looking statements, including by way of
illustration and not of limitation, statements relating to liquidity,
revenues, expenses, margins and contract rates and terms. The Company
strongly encourages readers to note that some or all of the assumptions,
upon which such forward-looking statements are based, are beyond the
Company's ability to control or estimate precisely, and may in some cases
be subject to rapid and material changes. Such assumptions include the
contract status of the Company's offshore units, general market conditions
prevailing in the offshore drilling industry (including daily rates and
utilization) and various other trends affecting the offshore drilling
industry, including world oil prices, the exploration and development
programs of the Company's customers, the actions of the Company's
competitors and economic conditions generally.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
LITIGATION - The Company is one of the defendants in certain
litigation brought in July 1984 by the Cheyenne-Arapaho Tribes of Oklahoma
in the U.S. District Court for the Western District of Oklahoma, seeking
to set aside two communitization agreements with respect to three leases
involving tribal lands in which the Company previously owned interests and
to have those leases declared expired. In June 1989, the U.S. District
Court entered an interim order in favor of the plaintiffs. On appeal, the
U.S. Court of Appeals for the Tenth Circuit upheld the decision of the
trial court and petitions for rehearing of that decision were denied.
Petitions for writs of certiorari filed by the parties with the U.S.
Supreme Court have been denied, and the case has been remanded to the
trial court for determination of damages. In June 1996, this matter was
settled, and the litigation was dismissed with prejudice, without
significant financial statement impact.
In November 1988, a lawsuit was filed in the U.S. District Court for
the Southern District of West Virginia against Reading & Bates Coal Co., a
wholly owned subsidiary of the Company, by SCW Associates, Inc. claiming
breach of an alleged agreement to purchase the stock of Belva Coal
Company, a wholly owned subsidiary of Reading & Bates Coal Co. with coal
properties in West Virginia. When those coal properties were sold in July
1989 as part of the disposition of the Company's coal operations, the
purchasing joint venture indemnified Reading & Bates Coal Co. and the
Company against any liability Reading & Bates Coal Co. might incur as the
result of this litigation. A judgment for the plaintiff of $32,000
entered in February 1991 was satisfied and Reading & Bates Coal Co. was
indemnified by the purchasing joint venture. On October 31, 1990, SCW
Associates, Inc., the plaintiff in the above-referenced action, filed a
separate ancillary action in the Circuit Court, Kanawha County, West
Virginia against the Company and a wholly owned subsidiary of Reading &
Bates Coal Co., Caymen Coal, Inc. (former owner of the Company's West
Virginia coal properties), as well as the joint venture, Mr. William B.
Sturgill personally (former President of Reading & Bates Coal Co.), three
other companies in which the Company believes Mr. Sturgill holds an equity
interest, two employees of the joint venture, First National Bank of
Chicago and First Capital Corporation. The lawsuit seeks to recover
compensatory damages of $50 million and punitive damages of $50 million
for alleged tortious interference with the contractual rights of the
plaintiff and to impose a constructive trust on the proceeds of the use
and/or sale of the assets of Caymen Coal, Inc. as they existed on
October 15, 1988. Subsequently, the court entered an order dismissing the
Company's indirect subsidiary. The Company intends to defend its
interests vigorously and believes the damages alleged by the plaintiff in
this action are highly exaggerated. In any event, the Company believes
that it has valid defenses and that it will prevail in this litigation.
On March 17, 1995, an action was filed by Louis Silverman,
individually and on behalf of all other shareholders of Reading & Bates
Corporation similarly situated, against the Company and the individual
members of its board of directors in the Court of Chancery of the State of
Delaware, New Castle County. On April 7, 1995 three additional actions
were filed on behalf of Congregation Beth Joseph, Harry Lewis and Mortimer
Shulman against the Company and its directors in the Court of Chancery of
the State of Delaware. In each of the four actions, the plaintiff
alleged, inter alia, that the directors breached their fiduciary duties by
rejecting the previously announced unsolicited merger proposal made by
Sonat Offshore Drilling Inc. and by adopting the previously announced
shareholder rights plan. Each of the named plaintiffs in the four actions
purported to be an owner of the Company's Common Stock and sought to
represent a class of shareholders of the Company who are similarly
situated. Each of the plaintiffs sought injunctive relief, damages in
unspecified amounts and certain other relief, including costs and
expenses. In March 1996, the plaintiffs in each of the four actions
voluntarily dismissed same on a without prejudice basis, and the court
entered orders accordingly.
The Company is involved in these and various other legal actions
arising in the normal course of business. After taking into consideration
the evaluation of such actions by counsel for the Company, management is
of the opinion that the outcome of all known and potential claims and
litigation will not have a material adverse effect on the Company's
business or consolidated financial position or results of operations.
Item 6(a). Exhibits
Exhibit 11 - Computation of Net Income Per Common Share, Primary and
Fully Diluted.
Exhibit 15 - Letter regarding unaudited interim financial
information.
Exhibit 27 - Financial Data Schedule. (Exhibit 27 is being submitted
as an exhibit only in the electronic format of this
Quarterly Report on Form 10-Q being submitted to the
Securities and Exchange Commission.)
Item 6(b). Reports on Form 8-K
There were six Current Reports on Form 8-K filed during the three
months ended September 30, 1996. A Current Report on Form 8-K was:
filed July 11, 1996 disclosing the Company's second quarter 1996
earnings; filed July 19, 1996 disclosing the confirmation of one of the
Company's Board of Directors, C. Kirk Rhein, Jr. as being a victim of
TWA's Flight 800 crash; filed July 31, 1996 disclosing that the
Company has entered into an agreement with Shell Offshore Inc.
pertaining to the Boomvang prospect in the Gulf of Mexico; filed
August 1, 1996 disclosing that the Company has reached an agreement
with Enserch Exploration, Inc. for a rig swap arrangement involving
"RIG 41" and the "M.G. HULME, JR."; filed August 5, 1996 disclosing
the Company's notice to redeem all of the outstanding shares of its
$1.625 Convertible Preferred Stock on September 30, 1996; filed
September 10, 1996 disclosing the Company's award from Norcen Explorer,
Inc. of a one year rig usage drilling contract for the "M.G. HULME,
JR.".
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
READING & BATES CORPORATION
Date: October 25, 1996 By /s/T. W. Nagle
-----------------------
T. W. Nagle
Executive Vice President,
Finance and Administration
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
11 Computation of Net Income Per Common Share, Primary and Fully
Diluted.
15 Letter re: unaudited interim financial information.
27 Financial Data Schedule. (Exhibit 27 is being submitted as an
exhibit only in the electronic format of this Quarterly Report
on Form 10-Q being submitted to the Securities and Exchange
Commission.)
Exhibit 11
----------
READING & BATES CORPORATION
AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE, PRIMARY AND FULLY DILUTED
(in thousands except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE:
Weighted average number of
common shares outstanding 62,686,024 60,085,177 62,312,556 59,846,582
========== ========== ========== ==========
Net income $ 22,645 $ 9,100 $ 51,952 $ 11,163
Less dividends paid on
$1.625 Convertible
Preferred Stock (1,206) (1,212) (3,631) (3,642)
---------- ---------- ---------- ----------
Adjusted net income
applicable to common
shares outstanding $ 21,439 $ 7,888 $ 48,321 $ 7,521
========== ========== ========== ==========
Net income per common
share $ .34 $ .13 $ .78 $ .13
========== ========== ========== ==========
FULLY DILUTED NET INCOME PER SHARE:
Weighted average number of
common shares outstanding 62,686,024 n/a 62,312,556 n/a
Assume conversion of (at the
beginning of the period):
$1.625 Convertible
Preferred Stock 8,372,482 n/a 8,366,454 n/a
---------- ---------- ---------- ----------
Adjusted common shares
outstanding - fully diluted 71,058,506 n/a 70,679,010 n/a
========== ========== ========== ==========
Adjusted net income applicable
to common shares outstanding $ 21,439 $ n/a $ 48,321 $ n/a
Adjustments:
Dividends paid on $1.625
Convertible Preferred Stock 1,206 n/a 3,631 n/a
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding
- assuming full dilution $ 22,645 $ n/a $ 51,952 $ n/a
========== ========== ========== ==========
Fully diluted net income per
common share (considering
only dilutive convertible
securities) $ .32 $ n/a $ .74 $ n/a
========== ========== ========== ==========
</TABLE>
READING & BATES CORPORATION
AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE, PRIMARY AND FULLY DILUTED
(in thousands except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FULLY DILUTED NET INCOME PER SHARE:*
Weighted average number of
common shares outstanding 62,686,024 60,085,177 62,312,556 59,846,582
Assume exercise of outstanding
stock options (based on the
treasury stock method) 1,253,686 586,779 1,238,426 285,941
Assume conversion of (at the
beginning of the period):
$1.625 Convertible Preferred
Stock 8,372,482 8,663,126 8,366,454 8,666,364
8% Senior Subordinated
Convertible Debentures 823,631 783,686 823,631 783,686
8% Convertible Subordinated
Debentures - 16,661 - 16,661
---------- ---------- ---------- ----------
Adjusted common shares
outstanding - fully diluted 73,135,823 70,135,429 72,741,067 69,599,234
========== ========== ========== ==========
Adjusted net income applicable
to common shares outstanding $ 21,439 $ 7,888 $ 48,321 $ 7,521
Adjustments:
Interest on 8% Senior
Subordinated Convertible
Debentures 945 814 2,714 2,328
Interest on 8% Convertible
Subordinated Debentures - 578 - 1,671
Dividends paid on $1.625
Convertible Preferred Stock 1,206 1,212 3,631 3,642
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding
- assuming full dilution $ 23,590 $ 10,492 $ 54,666 $ 15,162
========== ========== ========== ==========
Net income per common share
- assuming full dilution
(antidilutive) $ .32 $ .15 $ .75 $ .22
========== ========== ========== ==========
</TABLE>
*This calculation considers all convertible securities and is submitted in
accordance with Regulation S-K item 601(b)(11) although it is contrary to
paragraph 40 of APB Opinion No. 15.
Exhibit 15
----------
Reading & Bates Corporation
We are aware that Reading & Bates Corporation has incorporated by
reference in its Registration Statements No. 33-44237, No. 33-50828 , No.
33-50565, 33-56029 and 33-62727 its Form 10-Q for the quarter ended
September 30, 1996, which includes our report dated October 11, 1996
covering the unaudited interim financial information contained therein.
Pursuant to Regulation C of the Securities Act of 1933, that report is not
considered a part of the registration statement prepared or certified by
our firm or a report prepared or certified by our firm within the meaning
of Sections 7 and 11 of the Act.
Arthur Andersen LLP
Houston, Texas
October 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Reading & Bates Corporation for the nine months
ended September 30, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 35,045
<SECURITIES> 0
<RECEIVABLES> 75,936
<ALLOWANCES> 7,433
<INVENTORY> 11,983
<CURRENT-ASSETS> 118,836
<PP&E> 900,360
<DEPRECIATION> 288,265
<TOTAL-ASSETS> 738,651
<CURRENT-LIABILITIES> 45,165
<BONDS> 0
<COMMON> 3,557
0
0
<OTHER-SE> 408,013
<TOTAL-LIABILITY-AND-EQUITY> 738,651
<SALES> 0
<TOTAL-REVENUES> 199,303
<CGS> 0
<TOTAL-COSTS> 90,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,310
<INTEREST-EXPENSE> 9,786
<INCOME-PRETAX> 58,963
<INCOME-TAX> 3,369
<INCOME-CONTINUING> 51,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,952
<EPS-PRIMARY> .78
<EPS-DILUTED> .74
</TABLE>
